@theMarket: AI Trade Came Home to Roost

What goes up must come down, or so they say. The run in artificial intelligence stocks that propelled markets higher over the last two years has ended at least for now. Unfortunately, the area is taking the markets down with it.

 

Investors have certainly enjoyed a great run in all things AI. Plenty of companies have seen their stocks double and even triple in a short period of time. Momentum traders had a field day. When that play began to falter, other areas caught their attention. Traders began to sell AI and moved the proceeds into precious metals.

 

At first, it was just a few brave souls. But as that trade began to work out, more jumped in until it became a stampede. Like the AI trade before it, bidding up precious metals became a global phenomenon. U.S. and Chinese traders took the lead, and before long, the buying frenzy became a 24-hour trade of epic proportions. In January, the prices of precious metals exploded higher.

 

As AI and crypto prices fell, the market for precious metals soared. However, the gold and silver market is much smaller than the technology market. As such, metals soared in price far faster than the AI trade. It was a classic supply-and-demand situation — too many traders chasing too few investments. Until it wasn’t.

 

Over the last week or so, we have seen the momentum trade reverse. It started last Thursday in Asia and has declined steadily since then. This week, spot silver saw a breathtaking two-day bounce, only to fall midweek as Chinese traders sold it, sending silver down 18 percent by the time the U.S. market opened on Thursday morning. On Friday, prices rebounded again.

 

In the meantime, cryptocurrency prices, which have a high correlation to the tech-heavy NASDAQ index, fell as AI stocks deflated. This week, all of crypto's gains since the Trump Pump have been wiped out. Many players in both crypto and AI are now realizing momentum works both ways.

 

You may notice that the above explanation has little or nothing to do with fundamentals. Not a word about economic growth, inflation, Donald Trump, or tariffs and trade. None of that mattered. That is normally a warning that the overall market has reached a speculative peak that cannot continue without some consolidation.

 

So, what now? Does this mean that the bull market is over? Not at all. It just needs to consolidate a bit. To clarify, remember my thesis explaining the Santa Claus rally: the global flow of funds that fueled those gains is now reversing, as it does every year. With less money in the system, there's less fuel for gains — a simple but true relationship. Still, if this pullback continues, there are plenty of sectors worth your attention.

 

I still like emerging markets and overseas stocks in general. Small-cap stocks, in my opinion, will be the main beneficiaries of all this AI spending by the big guns. Google just reported a massive $180 billion spending plan for 2026; double the already massive bet they made last year. Amazon announced an additional $200 billion in AI outlays.

 

These stocks sank on the news, despite Wall Street applauding the confidence management showed in AI's future. But rather than buy Google and wait for a multi-year payback, I prefer to buy small businesses that will ultimately grow and improve productivity despite lacking the capital to expand their labor force.

 

It is a midterm election year, so the government spending and other goodies that Donald Trump is throwing at the market in the months ahead should keep the economy and the stock market buoyant. That should benefit anything small-cap like regional banks and maybe biotech. Materials, industrials, defense, and energy should also gain. The technology sector will still participate; it just won't lead as it has in the past.

 

The S&P 500 has lost all its gains since the beginning of the year at this point. My worries over AI expansion have come home to roost. As for precious metals, although they have been in a bull market for well over two years, I warned investors two weeks ago to take profits across the board in this area. It is not the end of AI, nor is it the end of the bull market in precious metals.

 

I think the worst damage has already been done in gold, but probably not the gold miners. Silver is still in no man's land. The problem is that the volatility in these metals makes them a "no-touch" for most of my readers right now. If you still want to take a stab at it, you know my email.